"killing lincoln" sixth and seventh respectively. number eight, supercawn in her book "quiet." followed by francona. the book recounts his tenure as the manager of the boston red sox. and number ten is mark owen's "no easy day." for more on these bestsellers go to nytimes.com and click on arts. >> next, alan blinder says the 2008 financial crisis was the result of the financial system becoming too complex and too up regulate -- unregulated. he also argues that government intervention, especially unprecedented intervention by the fed, kept the crisis from being far worse. this is about an hour. [applause] >> thank you very much, david. it's a pleasure to be here at washington's greatest bookstore.

you know, i live near or new york, and there's no agreement about what the greatest bookstore is in new york, but in washington there's very clear agreement, and this is it. i sort of feel badly, people aren't shopping and buying books right now. [laughter] but hopefully, that will happen after. david suggested that i start, as most authors do and it's a sensible place to start -- by the way, it sounds like i'm winding up for 45 minutes. i'm not. don't worry about that. [laughter] with why i wrote this book. and i thought quoting one's self is horrible, but i'd like to quote an e-mail that was sent to me by a reader. i won't name him because it was just a letter to me. a perfect strangerrer sent this on friday morning -- stranger sent this on friday morning to me, and this is what it says: dear mr. blinder -- sorry, i'm reading this because this is the answer to why i wrote the book.

i wrote back to this gentleman, you are the person i wrote this book for. this is exactly why i wrote this book. i'd like to start off saying thank you for writing a comprehensive book on the financial crisis. i've been waiting for a book like this to be released. i'm only on page 9 -- [laughter] he made a snap, he made a snap judgment. [laughter] but you'll see, you'll like it by page 9. [laughter] but have a clear picture as to how this fiasco began. my wife was on the train with me this morning, and she even began to read on with me. i do hope more people pick up the book. i'll spread the message i via social media and conversation. and here's really the punchline. i think it's important for the citizenry of the united states to read this book to understand that blame without understanding proves futile to moving toward bettering our nation. he just has it 100% right. the sad truth is, and it's very

understandable because the whole mess was so complicated, that people don't understand. and what we've gotten in america is anger. the anger is very easy to understand. people should be angry. they have the perfect right to be angry. but as this gentleman said, there's some understanding whether the anger is focused, then you have a better chance of changing things for the better. and it is meant, again as this gentleman said, to be a comprehensive look. there was a reason why i did a foolish thing for my own book royalties which is wait til 2013 to publish a book. i had publishers coming to me in 2008-'9 saying would you write a book on the financial crisis, and i said, no. i have no idea how this thing's going to end. and i can't write a book yet. i would have sold more then, i'm sure. but the question which you do get now i is why now? why a book on the financial

crisis? and that really is the reason. to take the point further to an important level, again, implied by this gentleman's letterer, my biggest fear is that what amounts to a gross misunderstanding of what happened and in particular what the government did in response -- and i'm coming back to that -- is liable to hamstring us as a society the next time newing remotely like in this happens. just imagine if europe had blown up financially as looked possible six months ago but doesn't look very likely at all right now. so we got what the markets were calling the lehman ii scenario. what would have been the chances of getting through the congress another stimulus, another t.a.r.p. or anything like that? as a lot of people in this room know, you can dam any piece of -- damn any piece of legislation now by saying like t.a.r.p.. people have this view that

t.a.r.p. was a failure, that it robbed taxpayers of $700 billion to dole out cash to undeserving bankers. the only part of that sentence that is accurate is the adverb "undeserving." [laughter] they were undeserving. they didn't deserve it. but when the ship is sinking, you don't quite worry about just desserts until you make sure the ship doesn't sink. but, in fact, the t.a.r.p. was a tremendous success. it -- the financial parts of t.a.r.p.. you may recall t.a.r.p. didn't start getting used for everything including the automobile bailout, but the financial parts of t.a.r.p. have turned a profit for the taxpayer. so it worked, turned a profit for the taxpayer, made sure that we didn't go into the kind of depression scenario that many people were fearing at the end of 2008-2009, and yet it's vilified. it's a code word for an awful government program. that's just a misreading of u.s.

ri. it's not so today it couldn't have been dope better, and if you read -- have been done better, and i have a number of criticisms where i think it could have and should have been done better. that withstanding, the best baseball player hits about .330. that means they're out 67% of the time. so it is not a -- i don't take it to be a damnation of t.a.r.p. to say they made these mistakes, and it could have been better. it was a tremendously successful thing. the other thing i worry about is that the whole country but especially the financial system is drifting pack to business as usual -- back to business as usual a bit too quickly. there's a good part of that which is the banks look nice and solid, and nobody's worried about them. that's great. we needed that, we wanted that. but you're starting to see risky behaviors of the sort that people were too scared of in the days after the crisis. they're becoming braver now.

and there are places where we like bravery. that may not necessarily be one of them. so just briefly, the way i organize the book is it starts with an interpretive history the first number of chapters. it's not journalism. so those looking to find out who was eating at an italian restaurant when he was interrupted by a cell phone conversation from somebody, i don't do that. of. [laughter] a number -- and i don't like to get interrupted while i'm eating at an italian restaurant. [laughter] a number of people can have done that quite well. i don't mean to denigrate. i've read these books, and i've gotten a number of things out of them. books about pieces of the crisis. i'm trying to be much more holistic and interpretive and explain to people what happened. quoting yourself is terrible. i'm only go going to read one sentence, this is the first

sentence of the book. did anyone get the license plate of that truck? [laughter] this is the way a lot of americans feel. we got run over by some big truck. we don't quite know why the driver was there at the time and why he wasn't pun you shoulded, by the way -- punished, by the way, for running us over and a bunch of things like that. those are the kinds of things that i tried to deal with. and especially as i was saying just a few moments ago, especially with the policy responses which were manifold, come for example, often -- complex, often counterintuitive and left many americans feeling that, to me, ironically feeling that their government turned against them. when, in fact, the government was doing a lot of good things to make sure we didn't have a second great depression. mark zandi and i, another economist with moody's -- well,

this is moody's analytics, -- wrote a paper on this a couple years ago where we estimated that without these policy responses we might have been looking at 16, 17% unemployment in the united states. a rate that we have not seen since the 1930s. nobody can know for sure, but it would have been a lot worse. and i think it's important that people,you know, develop not a detailed understanding, but a vague understanding of why the federal reserve did what it did. why we had the stimulus package at the beginning of the obama administration which did, in fact, raise the deficit. we all know that deficits are bad things. bigger deaf sets are -- deficits are bad, other things equal, but other things were not remotely close, and there was a cogent rationale for a stimulus package of that size and maybe even for a bigger one.

the biggest message of the book to me as the author is this paradox that there were massive government interventions induced and caused by the fact that the private markets ran amok. the private markets that went off the track, the government came in not perfectly, but pretty effectively to try to put things back on track. and yet at the end of the day we witnessed -- and you've all witnessed it as i have -- this quite sharp backlash against, quote, big government in the united states. now, americans have never liked big government. you call anything big government, and americans will be against it reflexively. but there was a reason for the government interventions. it was a market failure in the financial world the likes of which we've not seen since the 1930s. and if we had done nothing about

it, the 1930s probably would have been a preview of what was to happen. nonetheless, you did have this backlash against the government in general, against president obama because president bush left office shortly after all this started. but if he was armed, it would have been against him -- if he was around, it would have been against him. against the democratic party more generally, against the federal reserve, against keynesian economics which i'm here prepared to defend if anyone wants to ask about that. this was encapsulated, to me, by two events that kind of bookended the backlash period. one, my favorite cartoon from the crisis appeared in the new yorker around march 2009, i think. and it showed a page, i guess. this is set in a medieval castle

courtyard, and the king's head is on the chopping block, and the executioner's like that. and a page runs in and says, wait, stop, government's part of the solution, not part of the problem. [laughter] that lasted about two, three months. and after that people started thinking that the government was part of the problem. and when i say bookend, i think it's then bookended with the 2010 midterm elections which was just the electorate really angry at incumbents, angry at people that voted for t.a.r.p. which was the right vote though a difficult vote, and it resulted in the biggest turn in the house of representatives as the republican party i think ever, but the -- but if not ever, for a very long time. and it was this anger that i was talking about. very briefly do -- can i take a few more minutes? >> [inaudible] >> why? very briefly, why was this

tremendous anger directed at the government? well, first of all, i think there was a terrible slump itself. people are upset when people, when they or if their friends or their family members lose jobs, and many, many people lost jobs. secondly, um, the vast number of innocent victims that got dragged down, i don't know how many people you could actually point to, human beings that did things that deserved, that led them to deserve their fate, but it can't be more than a few thousand, maybe a few tens of thousands. we have 315 million people many this country and virtually everybody was a victim of the events that followed the collapse. despite this you can count on the fingers of one hand and you don't need all five to count up

the number of people that went to jail as a result of this. this is in stark contrast to savings and loan debacle of the late '80s and early '90s where something around 750 to 1,000 miscreants wound up in jail for what they did. now, am i sure that a thousand people should have gone to jail? no, of course not. and fraud, something you go to jail, it's a high bar to prove. but five or three? i could actually think of only one well known name, and it's not -- he's not even that well known. he's named in the book. here's a test. this is a very educated audience. whoever heard of lee farkas? that's what i thought. somebody said yes. two, that's pretty -- this is a good audience. [laughter] three. this is way, way above the national average. [laughter] he was the most prominent guy in the financial markets that actually went to jail for this. periny madoff's a whole different thing, it's not about

this. that was a whole different issue. and people are upset about that, and they still are. i mean, you're hearing this now in 2013. we're a little bit late. fourthly, a bank bailout is going to be hated no matter what. if the government does everything perfectly, including explain it perfectly which is my next point, it's still going to be hated. but to my mind there are degrees of hatred, right? this could be a ten, ap eight, a six. so the next point, if the government had explained better what it was doing and why, this includes the obama administration. i think the american people still would have been upset by the bank bailout, but as i said, there were degrees. and i think they could have a more accurate perception of what really happened than they do such as, for example, the t.a.r.p. that i mentioned before. um, sixth, as those of you who have been paying attention -- now you do have to pay attention -- there was quite a

backlash against the federal reserve as if it came out of nowhere and started grabbing power everywhere. i can remember a sarah palin attacking ben bernanke and then attacking me when in "the wall street journal" i defended ben bernanke for printing money. wow. the federal reserve prints money? who knew? laugh this is why -- [laughter] this is why we have the federal reserve. this is what it's been doing since 1914 when it first came. but to a number of americans this was a revelation, and you had bernanke and his colleagues doing all sorts of things they didn't know that they could do. you had, as i mentioned earlier, the explosion of the deficit. americans have always at the lip service level -- so when i say "always," i mean as long as we have polling data. this goes back at least to the '30s, and i'm sure it was true earlier than that, thought

deficits evil. it's a bad thing. franklin roosevelt railed against the budget deficits of herr butter hoover, for example -- herbert hoover, for example. but if i don't you look at the e polling data, you always see the exception of spending on international affairs, foreign aid. single exception. americans oppose every single thing that might reduce the deficit. any tax you name, any piece of spending other than foreign aid and the plurality of americans and typically the majority of americans is against it. so a strong lip service of -- aversion to deficits, and the response of this crisis did blow up the deficit to levels that we never imagined possible, and that certainly didn't do it any good. and then, finally, most controversially -- and i'm sure the president of the united states doesn't agree with

this -- but in my view it wasn't just that he didn't focus like laser beam on the economy. remember the old bill clinton strategy, saying in 1992 when the economy was nowhere near as bad as the one barack obama inherited, he was doing so many things at once. i mean, give him credit, he accomplished an incredible amount of stuff. but one result of that is it was very hard for the american electorate to see the forest with all these trees popping up. like, what did health care reform have to do with getting people back to work? the answer is not anything really. although it was a good thing to do in its own right. in my view, not in everybody's view. and so you had people watching this burst of act -- activity in 27 directions at once and not

perceiving the really excellent job that the obama team did in preventing a much worse fate than we could have had. so i think i've talked too long already. let me stop there and see what sort of questions. i'm in trouble here. of. [applause] >> thank you. >> you'll take the questions. um, this is a bit of a town meeting, so if you're comfortable saying your name, please do. and line up at the month, and everyone will get a chance. of so, please, have a brief question. as opposed to a long speech. [laughter] >> i'm dr. caroline poplin, i'm an attorney. my question is, should the banks have been forced to write down mortgages? people were blamed for lack of,

quote-unquote, personal responsibility, but the banks were the ones in a position to see whether people could pay for those loans or not. >> yep. >> and if they didn't -- if they chose not to look, that was their problem, and that would have put more money in people's pockets, and we wouldn't have these hundreds of thousands of people underwater. >> you're -- could you hear the question? okay. you just posed one of hardest questions about this whole crisis. i tend not to equivocate, but i'm going to equivocate on this one, and i'll tell you why. in order to get this behind us and to face up to reality, the answer to your question is clearly yes, banks should have been, should have written down more mortgages. that would have -- once they were written down, that would have enabled them to be sold more freely, and you could sort of break the log jam. here's the problem. given the volume of bad mortgages, had that been done on

a large scale throughout the country, a very large fraction of the banking system would have been insolvent. and then we would have had gigantic claims on the fdic to make good on depositors, a need for even more money for the bank bailout than the t.a.r.p. provided, and it seems to me unwilling -- unlikely that the taxpayer via their elected represent thetives would have been willing to come up -- representatives would have been willing to come up with that much cash. loans, equity infusions, it wasn't giving away money, but it had had the aura to a lot of voters of giving e away money, and you just wouldn't have had the public support. so now you have the bank regulators with the choice of forcing these banks write down more mortgages to realistic values, and now we'll have -- i maybe up a number -- 5,000

bankrupt banks on our hands. what do we do then? that's why i equivocated on your answer. >> hi, thank you. my name is dick smith. ordinary citizen. [laughter] >> the best kind. >> i'm just wondering -- >> i think he needs to talk closer to the mic. >> i'm wondering if you could say something, and i'm sure the book does but i haven't really looked about it yet, about where we stand now in regulation of financial institutions. >> yep. the question is where we stand now on regulation of finance. i think we stand -- what's the best way to put this? i think we stand in the fifth or sixth inning of a good ball game when it's over. but it's not over. what do i mean more specifically? i think the dodd-frank legislation which is the main reform legislation that passed in the summer of 2010 is a pretty good bill.

now, nothing that is 2,319 pages long is going to be flawless. this is not flawless. so many people have criticized dodd-frank for a number of things including myself. though i'm an admirer, actually, of the whole package. but in the united states of america, the legislation that congress passes is just the beginning. the regulatory agencies then have to flesh out many, many details. you know, this gets ridiculed as if it's silly. congress writes typically legislation that's skeletal. if you just read some of the things that are in the law, in any law including dodd-frank, what does that tail between "specifically"? if it's a regulatory bill, the regulators have to flesh it out, and the 2,000 pages become yoked

yoked -- become god knows how many pages. it's not over yet. many of those things are still on the drawing board, and many of them are being fought tooth and nail by the industry. i'll just give you one example which is one of my pet peeves. dodd-frank goes some way, and i applaud dodd and frank and others for this very very much, towards forcing derivatives to be standardized and traded on organized exchanges like stock options. well, stock options are a derivative. that is a very familiar dative ri that's been standardized and trading on originnized exchanges for case, and it works really well. one upshot of of that is if you decide you'd like to buy apple call options with a strike price of $419.27 that expire on your birthday, you can't do that. you go to the market, and they're a standardized commodity. you pick the one that's closest

to what you want to do. the over the count derhode island tyes -- derivatives market was just the opposite. l that means, first of all, that nobody's really paying attention. there's no standardization, no market trading. if the counterpart gets in trouble d counterparty gets in trouble, then you're in trouble. and these were ones that got us into big troubles. dodd-frank takes some of that on and pushed things towards organized explainings. the industry is fighting back norsely. i don't think it's gone far must have but, but in the right direction. but that's just one example of the voelker rule, of things yet done. so we don't yet know what this ball game is going to look like when we get to the ninth inning.

>> what what is the likelihood n even more dangerous fiscal cliff lying ahead as the result of the cumulative effects of the fed's policies, in many particular that of maintaining interest rates artificially lower what you call quantitative easing? i ask especially because recently bloomberg economic journalist eric cohen had an article on this on the front page of "the washington post", and this is what he said: quantitative easing not only hurts older americans on fixed incomes and those who have dutifully saved for retirement, it also frustrates younger people who can't afford to take advantage of historically low mortgage interest rates. mainly, bernanke's quantitative easing helps wall street's banks

and traders, a dynamic that could be setting us up for another financial crisis as investors begun seek out higher- again seek out higher-yielding, lower quality investments that wall street is only too happy to provide. >> right. i don't agree with that last parking lot. i think -- i don't think there are a lot of people on wall street that are just delighted that interest rates are zero. there's a lot of lenders there, and they'd like to get more than zero when they lend. that said, what you said or whether cohen, i'm not sure if -- >> right. i was reading it, yes. >> said about low interest rates hurting peopling in general who -- people in general who live on interest, and that's largely older americans. i'm an older american myself these days. it's true. and they are a victim of the medicine. medicines have side effects. and this is one of the side

effects of the medicine. nonetheless, we still need the medicine because those very low interest rates are helping bring the housing market back to life. it took a long time, but now it's definitely coming back to life. they are -- they have been except for this last quarter, i hope it was an abhorrent -- doing a lot of good for the investment community. the firms can boar to row very cheaply to invest, and that's necessary to pull us out of this muck. so there's a reason for the very low interest rates, and it it's unfortunate that they're bad for some people, but they're good for other, for other people. as to a crisis in the future, my guess is that it's, there's a problem for the future that won't be a crisis. so let me be more specific. when interest rates are so low that they basically can only go up and we're pretty much there,

that means that eventually they will go up. the key board -- the keyword many that seasons is "eventually." this does not look around the corner to me or, more importantly, ben bernanke and his friends at the federal reserve. but when they do grow up, there are going to be capital losses all over the place because when interest rates go up, bond prices go down. and lots of us that own government bonds -- that includes my wife and i -- are going to suffer capital losses. and if, if crucial, the risk management systems of financial institutions fail anywhere like what they fail, how they failed in 2008-'9 -- now, hopefully, they've learned the lesson and that's not going to happen, but if they do, there are going to be serious losses to a lot of financial institutions. if that happens, we should hit them over the head with a sledge

hammer. it's one thing they screwed up badly in 2007, '8 and ooh 9. they should be learning from that. if they're not, then they're going to suffer significant losses. that is inevitable. the only question is the timing, including the speed. .. people into shoo be listening and if they are, this should

unwind -- i don't want to say painless limit people will lose money on this. but should not cause a financial cataclysm. you're welcome. >> i'm ordinary citizen number two. >> not number two. there are several. >> so, you talked a little bit about in the beginning about the efforts made by the government and the fed to kind of pour -- >> louder. >> -- talk about the effort the government and the fed together to pour capital into the financial situation so stabilize it so. the result is the rounds of quantitative easing that resulted in what we -- the cdos call one through four and the increased buying of government debt, as a result the feds' balance sheet has ballooned significantly in the

last couple of years. so do you see this as a macroeconomic threat if it is not wound down soon enough? if so, what do you think a good timeline or good way to wind these assets down. >> most of the question, you races a few 0 thing busy mostly about the size of the fed balance sheet and how could be get out of that. which is exactly what chapter 14, i think -- i'll have to look -- of the book is about. here's the short answer. the fed came into this crisis with a balance sheet of roughly 900 billion. call it a trillion among friends. a trillion. and now it has three trillion. the fed wants to go back to something much closer to one trillion eventually. let's say one and a half trillion. i don't know. if it's one and a half trillion

they have to unload half of their assets. is this difficult? no, not technically. when people ask me, how is the fed going to get out of this, say the same way it got into this. i. got into this by going into the market place and buying a lot of stuff it will get out of it we going to marketplace and selling a lot of stuff. timing is crucial. they will not -- here i'm confident -- dump it all at once. they're not going to do that. this is not a bunch of bozos. they have responsibility for the financial system and they will sell it out gradually. now, here's the question that may be a number of your questions. there is conceptually an absolutely ideal perforate of selling done the fed's assets. nobody knows what that is. that includes ben bernanke, who is a very smart man.

the fed will have to try to find that rate by trial and error. if it's starting selling too fast, it will see the market react. if it's not selling fact enough, the market will react. this is the principle reason why i'm not so worried. the fed will have hundreds and hundreds of opportunities to adjust. faster or slower, if i doesn't look like it's hitting the rate exactly. will they get it exactly correct? no. the federal's inflation target is 2%. it is easy to imagine that we come out of this episode with either 3% or 1% because the fed misses. they can miss in either direction. the inflation -- we talk about one direction, the fed is going to sell too slowly and we're going to get too much inflation. they're din jerry, symmetric danger on the other side. i can even imagine a range from 2004 to two, a two personal point error itch have a hard

time imagining much more than that because of the feedback the federal is constantly getting. so, to think, as you hear sometimes, we're going to come out of this with double-digit inflation because of all the money created and won't be destroyed, that a bet on a degree of incompetence by the federal reserve that i just don't see any evidence for. is that all right? >> i appeal to the judge here. >> my name is justin got and i'm also an ordinary citizen. i had a question for you got something you touched on earlier, and i suspect also in your book, about the lack of prosecution towards potential offenders as around the crisis. my first question is, why do you think we -- the government did not prosecute more people involved with the crisis, and also are we now past the point where we would see prosecutions

for potential offenders? >> the second question looks to me easier to answer, which is, i don't think so. looks like it's been a frustration of mine and millions of americans, the government has been so slow to get to this -- i don't know -- i don't want to say party -- to get to this job, to get to this task. put off and put off and put off. you can see the administration gearing up to do more about it now, quite late. so i think there will be more. why not? i've been asking myself this question for years. here's the best i can do. i don't pawn this off as a good answer because i've been scratching my head about it, why aren't they doing something about it? i think the main reasons are two. one, i alluded to before. that to actually prove fraud is a high bar to jump, and in many of these cases, it may not have been a fraud.

misleading people is not quite a fraud, though if you do it enough it ills a -- it is a fraud. show to government has actually lost a few case. attach people to court and lost, because they couldn't cross the high enough bar for a fraud. but i think the other reason, which bothers me, frankly, is there was a feeling in some parts of the government that taking too many of these financial executives to court was going to upset the market and we would have more cracks and eruptions in the market. i hope it was the first reason more than the second. it's hard to get into people's heads what they're really thinking. you're welcome. >> i'm mark, thank you very much for your years of service and for writing this book. >> thank you. >> we're paying a big price for the polarized politics in america.

we have these jerrymandered districts districts and both on the left and right, extremes going against even mow extremes at times and a lack of compromise. s a as you know bob woodward wrote an interesting book, the bryce of politics, on the failure to make a meaningful compromise on the budget, and i'm just wonders, how do you see the interaction of politics with what should be a more rational policy coming out of both the fiscal side and on the monetary side? >> now, it's going to be hard for know answer that very good question without sounding partisan. so probably a lot of you know i'm a democrat. and so -- if you don't, i've now revealed it. i think along with norm and

tom -- a lot of you may be fame with that book -- it's not really symmetric. it's not 100% zero% either but it's very far from 50-50 on the parties, and i think you have the republican party move very far right, so far right that if you abstract it from the man, who is very appealing personally and just imagine ronald reagan's views on everything being embodied in a current politician, i don't think the republican party would accept it. it's way too left. and that makes compromise difficult. now, as i said, it's not 100/0. there's a wing of the democratic party that also doesn't want to face up to the reality that -- it's often said he have to curb entitlements. this is not true. we have to curb healthcare spending. if we could get that spending

under control and fix social security -- which is really easy, and wouldn't have to do anything horrible to social security -- forget about the rest of the entitlements. first of all there's hardly any money there and they don't matter. we can -- curing the long-run budget problem -- i'm talking about looking of decades -- during the long-run budget problem is terminus with putting the health care cost downward there some democrats that are just dug in about that, about not doing anything about medicare and medicaid but it's not the majority and certainly not the president. you may remember when it looked like there might be a programmed bargain, a lot of democrats were angry at president obama because he was willing to compromise on things on medicare. we have to do that. having said i'm a democrat -- i guess two points. the first will show i am a

democrat and the second will be to the other side. it is not politically realistic we're going to fiction this budget problem without more revenue. the revenue inside the last compromise with60 billion a year. this is a def -- deficit of a trillion a year and the numbers don't compute. but the republicans are holding to that. on the other hand if you look at the horrific long-run projection of the congress budget office or anyone else who makes projections, it's lewd you completely impossible, to think that we're going to close that whole gap on the tax side. it's impossible. americans would have to accept taxation rates that sweden accepts. we are not swedes. americans will not allow 52% of their gdp to be represented by taxes. we won't. and so if there's going to be a realistic long-run solution, it has to be curbing healthcare

spending, one way or another. i wish i could now tell you, here are the three magic things that will solve the whole problem. i can't. >> hello. my name is renee matthew. i wonder if you would like to respond to steve probst's otherwise favorable review where he asked why you hadn't put the financial crisis in the context of global trade imbalance? >> could you hear the question? okay. steve probst finished his review, as i recall, hiding me for not basically blaming the global trade imbalance for the crisis. the answer is, because that's not what caused it. we have had trade imbalances for

decades. it's not years. it's decade, and we didn't have anything like what happened over the mortgage blowup and the derivatives and all of that stuff. it is -- the world is interconnected and causation is always running in both or many directions at once. but this is very clearly a case where shenanigans in the united states -- and also from other countries, ireland, ice lean, england, et cetera -- and the rest of the world. it wasn't the rest of the world doing it to us. it was us doing it to the rest of the world, and that's my answer. if steve was here to why i didn't blame these international trade imbalances for the crisis. >> my name is can be and i'm -- my name is ken and i'm an

economist. >> as opposed to an ordinary person. >> that's what i'm sometimes told. let me offer a hypothesis for your comment. at the time that the obama administration was trying to determine the size they for the deficit for the stimulus package there were expectations if they didn't do anything the amount of gdp decline would be at a certain level. in fact, however, the trajectory was far, far steeper, and, therefore, a primary criticism of the stimulus package is not that it was too large but it was too small. >> i half agree with that and let me explain. the agree part is -- let me just put on my economist hat because that's what i am. if you look at the perils facing us and what had happened already, what was likely to happen, a larger fiscal stimulus was called for in the sense, if you view it as theirs a big gap

and we ought to fill a large hunk by fiscal stimulus to save the economy, that would have taken much more than $800 billion. if i take off my economist hat and put on my ordinary citizen hat, which the much more important in this context, the notion that say, pick a number, a $1.2 trillion stimulus bill could have gotten through the united states congress is totally fansful. i don't know what was the exact maximum amount of stimulus that could have passed the congress but i think the obama administration came really close, and the vote looked like it was really close. so, if -- rather than see them being stubborn and saying, 1.2 trillion or bust? we would have got bust. i'm very glad they compromised on 800 billion. i don't criticize them at all for that. >> i'm not a citizen but i pay taxes here.

>> that's the important part. >> i want to see no wasting. i am not sure i agree with your assessment it was too big, this crisis. i think in -- these students are going to say this crisis didn't need to happen. there was during the mortgage debt was 10 trillion, which 1 trillion was in the subprimes. now, those properties were not destroyed by war. they're all still standing there. so even if you mark them down to 50 cents on the dollar, people holding those bonds were facing losses of about 500 billion. only half of which were held by banks. so banks were facing losses of 250 billion, which is not a huge amount of money. the reason why the crisis happened was because banks didn't know which of their colleagues was holding their stuff. so, they stopped lending to each other, which dried up the interbank market, dried up

liquidity and there was no trading so the price of them fell below the value of the under -- the underlying value of the houses. which began to threaten the capitalism. so this is the thing that mushroomed out of control as a result of lack of transparency between the banks and the regulators insisting on mark to market. back in the real economy, though, the debt rate of u.s. households was only slightly above where it had been previous limit 17% to 15% at previous peaks. everybody looked at this as debt to income ratio. that's not the real thing to look at. i it's debt to service income ratio. i think this crisis did not need to happen if banks were transparent, regulators had shown some forebearance. that being said, the guys that made the big mistakes in the

banks are still there the guys that ran goldman sachs and bet the bank on aig-are still there if they was indonesia or korea or mexico, they would have been removed. >> i agree with almost everything you said. let me take the parts i don't agree with. first of all, as i -- a previous questioner asked, the mortgages that the banks were holding -- the mortgages -- were not mark to market. were not mark to market for that reason. basically everything else you said was correct, and the thing i would like to add -- especially the fact that this crisis could have been avoided. i don't think it's because of the regulators forcing things to be mark to market. it was because of some of the other things, the mistrust, the lack of transparency, who can you trust to deal with? the inconsistency of the treatment of bear stearns and

then lehman brothers which threw the market for a loop, what are the rules? the important part you omitted but i don't think you'll disagree -- on top of the trim -- trillion or so of dubious mortgages -- probably less than a trillion -- was built by wall street an inverted pyramid of cdos and cdfs and synthetic this and make believe that and complicated stuff that hardly anybody, including the wall street banks, understood. and all of it, however, was predicated on -- this where is my title comes from -- the music continuing to play. the music being house prices keep going up. if house prices had kept going up, 10 parse -- 10% a year from 2006 to this very day, imagine how high that would be. but if that happened, none of this collapse would have

happened. it would be waiting for news a bigger way. but it was this inverted pyramid of securities and derivatives that lent -- that took, say, $500 billion of mortgage losses and turned it into trillions and trillions of dollars of financial losses. and that was crucial, too, to making the crisis as big as it was. that is why in the early days of the crisis, smart people, like hank paulsen, who was then secretary of the treasurery, and ben bernanke who was then head of the fed, said this is not that big and will be contained. it was only the mortgages, only the subprime mortgages, they would have been right. but it wasn't. it was a lot more. >> hi. richard wither -- wizner, interesting system. i'm up to page 18. if i get through it i'll get the answer to my question. has to do with the troubled

assets. starting with bear stearns we leonard $30 billion had to be distracted from their books to make that work and the other banks helped out, all these bad assets were taken off and i guess approved by the government. i'm wondering, where are they? were they repackaged or going to be repackaged and out to the private sector or nonperforming or somebody trying to collect? how big is that and where are they? >> i don't think it's big anymore. the government did not acquire all that many of the bad assets. they acquired some. the big, big purchases, huge volumes, were by the federal reserve of mortgage-backed securities. not mortgages themselves but the securities based on the mortgages, and the federal reserve was -- put this -- somewhat picky about what it would buy. it would not buy the worst stuff. it was basically buying only the

fanny, freddie guaranteed paper. not all of which was fabulous, but fannie and freddie had within this pool of junk, fannie and freddie had the best stuff and that's what the -- some cite tieron, you're thinking. but that is what the fedded bought. since the crisis those have risen substantial limp that's what the truss are you did with aig, buy low, sell high. the answer is, -- first of all, the senate is still holding that stuff, the -- but now if the fed -- actually the fed is marking that stuff to market. showing a huge profit on that. it doesn't want to sell yet for the reasons we spoke of earlier but if the fed was going to sell it, it would be making a

profit -- in fact, here is a fact that is barely believable but i have it on good authority that it's true. it's not only the case that the federal reserve total portfolio is showing a big profit on these purchases, but it hasn't bought one single loser. i compare that my portfolio. imagine if i didn't have a single loser in my portfolio? the fed doesn't have one single loser in the portfolio. and the reason it bought at the bottom when nobody else would buy. that's why it did that. came in and bought this stuff, in some cases at ludicrously low value. >> hello. i'm eleanor and i describe myself as a fiscally responsible democrat. >> good. >> and it has been annoying the hell out of me, year after year,

that republicans, who were viewed as fiscally responsible are not, it's left the democrats. virtually all of the bush administration, we had guns and butter and more guns and butter, so we didn't even go to the first day of economics 101. and so we now, the democrats, have to try to work out stuff on the deficit, counter -- which somehow the republicans overlooked that. so my specific question is, going back to the issue of interest rates, as you say, they've got to rise at some point, and i'm concerned that the increase in debt service on the government bonds may wipe out or severely hamper these

measures they're trying to take. >> you're right to be concerned. the interest rate now on u.s. government debt held by the public -- that's the part that matters, what is independence the trust funds doesn't matter because it's one government pot paying another government pot. but the pot held by the public is extraordinarily low. by historical standards. it -- i guess i said before it can only go up. it could go down a little more but it's basically at some point going to go up, and that -- i believe will happen slowly. i said this before but there's always a chance it happens rapidly -- is going to add hundreds of millions of dollars to the federal budget deficit. and it's not a question of, will this ever happen? it will happen. the question is only about the timing and as you suggest, that event, or the series of events, as it takes place, will wipe out

a significant amount of deficit reduction that the congress is fighting so hard and come so grudgingly to achieve. this is not going to be a happy town when it comes to budgeting for a long time, i think. >> something else that could have been avoided. >> well, some of it. the part you mentioned certainly could have been avoided. i would draw a big distinction between running deficits for no good reason -- but that means fighting wars without paying for them? medicaid part d, chase good program, but every other entitlement we ever enacted had a revenue source. this one had none. there was no rope for that. the big increase in the deficit under president obama there was a reason for it. we were fighting a terrible recession. >> tax cuts, the bush tax cuts.

>> and the bush tax cuts. how can i forget that. >> the biggest. >> this will be the last question. the gentleman was moving into line before i finished speaking. >> thank you. i'm tim. i consider myself an ordinary citizen. i should also disclose i'm the person who oversees the troubled asset relief program. >> i've fortunatelily been praising. >> first of all i want to thank you. i haven't read the book yet. i look forward to. but having lived this for the last four years your book is very welcome. it has been very, very difficult to explain things, and i'm glad that you're doing it. i also would agree there are undoubtedly things we could have done better and those will become clearer with time. we try not to -- still a little too close to really analyze that but one that i'd seen you mention in interviews that i would appreciate your thoughts on, is the issue of, could the

program have been designed to encourage more lending? i wasn't there when paulsen -- >> absolutely. >> there's obvious issues there as to whether you enend up encouraging imprudent lending. as to the demand side of the equation, as to what the uk tried to do, which didn't really work, because they actually put covenants in their rescue to do that. so i'd appreciate hearing your thoughts. >> a very good question. the question has to do with -- i do mention this in the book -- that when the original t.a.r.p. rules were written in the bush administration, there was no requirement that, as a condition of getting the money, the banks did anything in particular with their lending portfolio or almost anything else. i might broaden your question. the public purpose conditions on the original t.a.r.p. were really negligible. so i would broaden it. i thought there should have been some. for example i think the taxpayer

could have gotten more of the improbable upside that happened. if you think about what might have been the commercial termed of options on bank stocks then? we could have done better. now, the hard question is the lending. i think the part that would have done the most good for the economy is if banks had some kind of lending conditionality. i think while in normal times that is exactly what you don't want the government to do -- you don't want the government telling banks they should lend more or less to this sector, that sector. but when the government is becoming a shareholder, and when public money is being put at risk, -- all turned out great but it was put at risk -- i think the public has a right to some public purpose conditionality, and the one i think would have done the most good but was probably the hard toast get done, was the lending. i think it